Saturday, April 11, 2009

Spring roadmap

for the S&P 500 has relevance to me for a few reasons. One is that a flat to rising stock market is supportive of all equities and gold miners are no exception. Yes, the correction over the past week was brutal and demoralizing if you were a gold stock holder, as general stocks went up and added salt to the wound. However, the gold stocks and gold are bottoming on a short-term basis and I believe are about to turn up into their final 4-8 week spring run. This I believe will match the topping out process of the S&P 500.

When the hot money flows out of rapidly rising sectors like the financials/banks, it will flow into gold and gold equities. Once the S&P 500 starts topping out, I'll be looking to exit gold mining stocks. Remember that gold miners will fall with general stocks during the next leg down of this cyclical bear market. Gold mining stocks will be making a routine bull market correction (i.e. will NOT be making new lows) while general stocks will be heading for new lows.

Knowing these things in advance can help traders focus and long term gold stock holders understand that a correction will come after the spring top and gold stock corrections can be sharp and ugly. I hold physical gold as my cash, which is not to be traded, and speculate with the rest of my investment money. I am currently fully long the gold mining sector using call options on Goldcorp (ticker: GG), Royal Gold (ticker: RGLD) and Novagold (ticker: NG) as my speculative vehicles.

I think the S&P 500 can reach its 200 day moving average before the end of May, which is not a great deal higher from current levels. This will be a sign the top is in and I will then be looking to get rid of gold miners and go short general stocks to ride the next leg of the bear market down. Below is a 6 month daily chart of the S&P 500 with a rough projectional sketch of where I think we're going:

Because the 200 day moving average is declining, the S&P only has to reach the 900-930 range in May. Touching the 200 day moving average will satisfy the parameters of a typical intermediate-term bear market correction for general equities and generate my "widow and orphan" sell signal for the year. This would also fit with fairly typical seasonal patterns in the stock market (i.e. "sell in May and go away"). Because I am not interested in holding through a potentially steep correction in the gold mining sector, I will be exiting this sector before the end of May.

As far as shorting goes once the top is in this spring, almost anything will work, including senior gold stocks! This next leg of the bear market will take everything with it, including silver stocks. In fact, I believe everything except the gold mining sector will make new lows.